AMP head of investment strategy and chief economist Shane Oliver has warned that while markets have continued to take the latest round of tariff announcements “in their stride”, there is a risk markets have now become overly complacent.
Earlier this week, US President Donald Trump informed 14 nations they would face higher tariffs from a new extended deadline of 1 August.
Trump then released a further batch of tariff letters to US trading partners on Wednesday, including a 50 per cent tariff for Brazil.
In a post to Truth Social, Trump also confirmed on Thursday (10 July) that a 50 per cent tariff on copper would apply from 1 August after receiving a “robust national security assessment”.
He also announced a potential 200 per cent tariff on pharmaceuticals earlier this week.
While markets have remained relaxed so far in response to the latest tariff announcements this week, Oliver warned that tariffs could have a significant economic impact if they commence as planned on the new 1 August deadline.
“When Trump first announced the big tariffs on Liberation Day, markets went into a panic but then he backed down,” said Oliver.
“So, there’s now a feeling that whatever happens, Trump eventually backs down, therefore things won’t be as bad.”
However, Oliver warned there was a risk that markets were now a little too complacent in relation to potential tariffs from the US.
“There’s an element of the boiling frog analogy, where if a frog is thrown into boiling water, it jumps straight out but if the frog is placed into the water and the heat is gradually turned up, it doesn’t realise what’s happening and dies,” he said.
“We had this immersion of massive tariffs back on Liberation Day and markets panicked and that caused Trump to back down. Whereas now, everything seems to be assessed relative to that and things aren’t quite as bad as back then.”
The delays in implementation and have further fueled the complacency in markets, he said.
“The market is thinking, well, there’s been a delay, maybe there’ll be another delay and despite what Trump says he’s always backtracking and in any case there’s still time for negotiation,” said Oliver.
“However, there’s this danger here that it does become like the boiling frog where we’re seeing tariffs creeping back in again, markets relatively complacent and eventually we’ll get to a point where the market thinks ‘this is actually pretty bad’ where the tariffs are being implemented, there hasn’t been enough deals and we’re starting to see weak economic data,” said Oliver.
Oliver noted that the initial collapse in markets that happened in April was based on the fear that economic data would fall away quickly, leading to a slump in profits.
“That hasn’t happened and we’ve seen backdowns on tariffs and delays,” he said.
“The risk for markets is that there is no delay this time around and that the tariffs actually go into effect and then, more fundamentally, that we start to see the weaker economic data in response to these tariffs.”
Oliver warned that this could result in a greater economic impact, which could potentially “blow back the share markets and [lead to] another correction”.
He also cautioned that the months August and September are often seasonally tougher for share markets.
“Markets are looking through it at the moment but you do wonder whether they’re being overly complacent with all of this and once the economic impact becomes clear, then you may see more weakness in markets. That’s the main risk,” he said.
In terms of the confirmed 50 per cent tariff for copper, Oliver said this would have a very minor impact on Australia.
“We send a small amount to the US but not that much and we’ll find other markets for that,” he said.
Oliver warned that the potential tariff on pharmaceuticals would pose a larger threat.
“It will be bad news for companies like CSL and others,” he said.
He noted, however, that the US market overall was relatively small for Australia.
“That’s not to say that it won’t be an issue for the producers of the products affected, but in terms of the overall economy, its fairly minor,” he said.
